STC

Business Context and Reporting Period

Company: Stewart Information Services Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: The Company operates in two primary segments: title insurance and real estate information (REI). It provides title insurance through direct operations and a network of over 6,800 issuing locations across the U.S. and internationally. The REI segment provides electronic real estate services, mapping products, and geographic information systems.

Key Financial Metrics

Figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 38.7% in Q2 2003 compared to Q2 2002, and 33.2% for the six-month period. Title insurance revenues drove this growth, with direct operations up 57.8% (Q2) and agency operations up 28.7% (Q2).
• Profitability: Net earnings more than doubled in Q2 2003 ($41.0M vs $17.7M) and increased 109.6% for the six-month period. Earnings per share (diluted) rose from $0.99 to $2.29 in Q2.
• Operating Environment: The increase in activity is attributed to declining mortgage interest rates (averaging 5.5% in Q2 2003 vs 6.8% in Q2 2002), which spurred refinancing transactions. The ratio of refinancings to total loan applications was 74.7% in Q2 2003 compared to 42.7% in Q2 2002.
• Expenses: Employee costs increased 38.9% in Q2 2003 due to hiring to support volume growth and acquisitions. Other operating expenses rose 22.8%.
• Loss Ratios: Title loss provisions remained low at 4.2% of title operating revenues in Q2 2003, compared to 4.3% in Q2 2002, aided by the high volume of lower-risk refinancing transactions.

Guidance, Outlook, and Risks

• Dividend Policy: The Board voted in June 2003 to recommence an annual dividend payout, with the amount and timing to be determined in Q4 2003. This reverses a previous decision to discontinue dividends in favor of stock repurchases.
• Stock Repurchases: The Company has a plan to repurchase up to 5% of outstanding common stock. No shares were repurchased in the first six months of 2003.
• Acquisitions: The Company spent a net $13.6 million on acquisitions in the first six months of 2003. Management notes that significant future acquisitions could materially affect debt and equity balances.
• Risks: Forward-looking statements are subject to risks including changes in mortgage interest rates, real estate market conditions, and legislation related to title insurance. Investment income decreased due to lower yields, though this was partially offset by higher investment balances.
• Contingencies: The Company holds guarantees for indebtedness of unconsolidated equity investees and third parties with a maximum potential payment of approximately $10 million ($1.7M for investees, $8.3M for others). Management believes no loss provision is needed.

Investor Verification Checklist

• Refinancing Dependency: Verify the sustainability of revenue growth given the heavy reliance on refinancing transactions (74.7% of loan applications in Q2 2003), which typically carry lower premium rates than sales.
• Expense Leverage: Monitor if employee and operating costs can be managed effectively if transaction volumes normalize or decline.
• Dividend Execution: Confirm the specific amount and timing of the recommenced dividend in the upcoming Q4 2003 reporting.
• Investment Yields: Assess the impact of the low-interest-rate environment on future investment income, which has declined despite higher balances.
• Acquisition Integration: Review the performance of recently acquired offices and the impact of the $13.6M acquisition spend on future cash flows.